A ship broker received an approach from a Chinese broker regarding the possibility of fixing ships to carry steel cargoes on behalf of a well-known local steel mill. The ship brokers approached the representatives of a Greek shipowner. A COA was agreed between the owners and the steel mill covering two shipments, to be performed later in the year. Nothing further was heard from the Chinese broker and the market was falling. The owners became concerned and contacted the steel mill directly. The export department of the steel mill denied having entered a fixture with the owners. They confirmed that they had heard from a Chinese broker who had offered them ships on a voyage basis. They produced copies of the written offers and pointed out they had declined to do business with the Chinese broker who had, by this stage, disappeared.
The owners sued the ship broker for US$ 850,000 on the basis he had acted in "breach of warranty of authority". The basis of this form of action is that a broker entering negotiations holds himself out as having the authority of his principal to do the business. If for any reason the broker does not have the authority, then he is liable to anyone who has relied upon his "warranty of authority". The broker does not himself have to be negligent to attract this liability. In this example, the broker dealt in good faith with a Chinese broker. The Chinese broker did not have the authority of the steel mill. The broker accordingly could not have authority when dealing with the owner's representative. Although theoretically the broker would have a right to claim an indemnity from the Chinese broker, the problem was that he had disappeared and did not have any traceable assets. A settlement was agreed.
The potential liability for Breach of Warranty of Authority is greatly increased in a falling market. The fact that a broker can be liable due to a default "down the chain" means that brokers should take particular care when dealing with new contacts, especially those located in emerging markets.